23
Models of Causality and Explanation in
Economics
Alessio Moneta
Scuola Superiore Sant’[email protected]
PhD in Economics Course
January-February 2018
First Lecture: J.S. Mill
Outline of the course
B Historical roots:
I J.S. Mill’s methodology of economics (1836)
I M. Friedman’s methodology of economics (1953)
I Keynes vs. Tinbergen debate (1939)
B The problem of causality in economics
B Causal analysis in the framework of structural vector autoregressive(SVAR) models
I graphical causal models
I independent component analysis
John Stuart Mill’s
Methodology of Economics
John Stuart Mill (London 1806 - Avignon 1873)
“On the Definition of Political Economy (And on the Method ofInvestigation Proper to It)” (1836)
Other important contributions:
I System of Logic, Ratiocinative and Inductive (1843)
I On Liberty (1859) Utilitarianism (1863)
I Principles of Political Economy (1848)
Mill’s empiricism: role of induction
In A System of Logic (1843) Mill emphasizes the role of induction in
science and opens to the possibility of learning causal relationships
from observations through the five canons of induction.
Of particular interest:
I method of agreement
I method of di�erence
The role of induction in economics
But of particular interest is also that in the book VI of A System of
Logic Mill argues that his canons of induction cannot be applied to
economics (to social sciences in general).
Argument: practical impossibility of running experiments, due to
the “immense multitude of the influencing circumstances, and our
very scanty means of varying the experiments.”
Mill’s (1836) essay: the question of definition
Do we need a precise definition to study economics? Probably no.
But definitions of economics convey what economists see as the rightfocus of the analysis, its method and a�itude.
B Cfr. Backhouse and Medema (2009) “On the Definition of Economics”JEP.
Mill’s definition
“The science which traces the laws of such of the phenomena
of society as arise from the combined operations of mankind
for the production of wealth, in so far as those phenomena
are not modified by the pursuit of any other object” (Mill 1844:
V.39)
Wealth
“Wealth is defined all objects useful or agreeable to
mankind, except such as can be obtained in indefinite
quantity without labour.” (Mill 1844: V.14)
Science vs. art
Science and art “di�er from one another as the understanding
di�ers from the will, or as the indicative mood in grammar di�ers
from the imperative. The one deals in facts, the other in precepts.
Science is a collection of truths; art, a body of rules, or directions
for conduct. The language of science is, This is, or, This is not; This
does, or does not, happen. The language of art is, Do this; Avoid
that. Science takes cognizance of a phenomenon, and endeavours
to discover its law; art proposes to itself an end, and looks out for
means to e�ect it.
If, therefore, Political Economy be a science, it cannot be a
collection of practical rules; though, unless it be altogether a
useless science, practical rules must be capable of being founded
upon it.” (V.8-9)
Laws in economics
Are there laws in economics? According to Mill, yes.
“Everything which can possibly happen in which man and external
things, are jointly concerned, results from the joint operation of a
law or laws of ma�er, and a law or laws of human mind.” (V.23)
Laws are statements of causal tendencies.
Causal tendencies may interfere with “disturbing causes”.
How do we learn about laws (in this sense)?
Complexity
Di�iculty of induction and experiments in economics because of itscomplexity.
“When an e�ect depends upon a concurrence of causes, those
causes must be studied one at a time, and their laws separately
investigated, if we wish, through the causes, to obtain the power of
either predicting or controlling the e�ect.”
Abstraction of homo oeconomicus
Solution: focus on a particular aspect of human behaviour: the desire ofimproving and maximizing wealth
“ [Political Economy] does not treat of the whole of man’s nature
as modified by the social state, nor of the whole conduct of man in
society. It is concerned with him solely as a being who desires to
possess wealth, and who is capable of judging of the comparative
e�icacy of means for obtaining that end.” (V.38)
B Cfr. Persky (1995) “The Ethology of Homo Economicus”, JEP.
Abstraction of homo oeconomicus (cont’d)
“[Political Economy] predicts only such of the phenomena of the
social state as take place in consequence of the pursuit of wealth. It
makes entire abstraction of every other human passion or motive;
except those which may be regarded as perpetually antagonizing
principles to the desire of wealth, namely, aversion to labour, and
desire of the present enjoyment of costly indulgences. These it
takes, to a certain extent, into its calculations, because these do not
merely, like other desires, occasionally conflict with the pursuit of
wealth, but accompany it always as a drag, or impediment, and are
therefore inseparably mixed up in the consideration of it.” (V.38)
Abstraction of homo oeconomicus (cont’d)
“ Political Economy considers mankind as occupied solely in
acquiring and consuming wealth; and aims at showing what is the
course of action into which mankind, living in a state of society,
would be impelled, if that motive, except in the degree in which it
is checked by the two perpetual counter-motives above adverted to,
were absolute ruler of all their actions.” (V.38)
The ceteris paribus clause
Pure economic theory studies economic behaviour isolating it fromnon-economic motives and omi�ing minor economic causes.
Use of ceteris paribus clause
But it could be called ceteris absentibus.
B Cfr. Mäki and Piimies (1998) “Ceteris paribus”, in Handbook of economic
methodology.
Role of introspection
How do we isolate the economic motives? By introspection according toMill.
The desires of man, and the nature of the conduct to which they
prompt him, are within the reach of our observation. We can also
observe what are the objects which excite those desires. The
materials of this knowledge every one can principally collect
within himself; with reasonable consideration of the di�erences, of
which experience discloses to him the existence, between himself
and other people (V.56)
Deduction
Once we isolate the economic laws by introspection, we can derive theirimplications by deduction. In Mill’s view economics is a deductive, a prioriscience.
“Since, therefore, it is vain to hope that truth can be arrived at,
either in Political Economy or in any other department of the
social science, while we look at the facts in the concrete, clothed in
all the complexity with which nature has surrounded them, and
endeavour to elicit a general law by a process of induction from a
comparison of details; there remains no other method than the a
priori one, or that of abstract speculation.” (V.55)
A priori vs. a posteriori
“By the method a priori we mean (what has commonly been
meant) reasoning from an assumed hypothesis; which is not
a practice confined to mathematics, but is of the essence of
all science which admits of general reasoning at all. To verify
the hypothesis itself a posteriori, that is, to examine whether
the facts of any actual case are in accordance with it, is no
part of the business of science at all, but of the application of
science.” (V. 45)
Applied economics
“ When the principles of Political Economy are to be applied
to a particular case, then it is necessary to take into account
all the individual circumstances of that case; not only
examining to which of the sets of circumstances
contemplated by the abstract science the circumstances of
the case in question correspond, but likewise what other
circumstances may exist in that case, which not being
common to it with any large and strongly-marked class of
cases, have not fallen under the cognizance of the science.
These circumstances have been called disturbing causes.” (V.
58)
Applied economics (cont’d)
“Having now shown that the method a priori in Political
Economy, and in all the other branchcs of moral science, is
the only certain or scientific mode of investigation, and that
the a posteriori method, or that of specific experience, as a
means of arriving at truth, is inapplicable to these subjects,
we shall be able to show that the la�er method is
notwithstanding of great value in the moral sciences; namely,
not as a means of discovering truth, but of verifying it, and
reducing to the lowest point that uncertainty before alluded
to as arising from the complexity of every particular case,
and from the di�iculty (not to say impossibility) of our being
assured a priori that we have taken into account all the
material circumstances.” (V.62)
Other issues
Composition of causes (linearity).
B Cfr. A System of Logic (1843), Book 6, Ch. 7.
To conclude on Mill
Mill had a particular idea of science for economics that had been
extremely influential: a separate science with a special (or peculiar)
relationship with empirical evidence.
Explaining economic phenomena through theoretical models.
Explanation is through causality. Causality is sustained by laws.
